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TheStreet Open House

The Stock Market Game Week in Review: March 30

While your students (and possibly some of you) might have been wondering how Sanjaya Malakar managed to survive another week on American Idol, one topic of discussion on Wall Street last week was the possibility of saying goodbye to quarterly earning targets.

What are they? The Securities and Exchange Commission requires every publicly held U.S. company to publish a quarterly report, officially known as Form 10-Q, describing its financial results for the quarter. This report and the predictions that market analysts make about it often have an impact on a company's stock price.

For example, if analysts predict that a certain company will have earnings of 55 cents a share in a quarter and if the results beat those expectations, the price of the company's stock might increase. But if the earnings are less than expected, even by a penny or two, the stock price characteristically drops, at least for a time.

The practice of issuing guidance on quarterly earnings has come under fire recently because some business leaders feel the focus on short-term targets undermines investment in long-term projects as well as long-term growth. Many CEOs refer to the issuing of guidance and the quarterly reports as "the tyranny of quarterly earnings." The laserlike focus Wall Street analysts place on quarterly earnings coupled with the regulatory burdens of Sarbanes-Oxley has been a leading contributor to the private equity boom. If you want to learn more about private equity, watch this video from TheStreet.com TV: Private Equity: Why Go Private?

On March 14, the Commission on the Regulation of U.S. Capital Markets in the 21st Century, a project of the U.S. Chamber of Commerce, urged executives to stop issuing their short-term goals. The group feels this action is necessary to reform the capital markets and avoid facing a possible economic decline. The practice of publicizing quarterly earnings is a "self-inflicted wound by American CEOs," says commission member Robert Pozen, chairman of MFS Investment Management.

The debate is not a new one; many companies have already quit publicizing their quarterly earning targets. But the issue has become urgent, argues the Chamber, as U.S. companies face growing long-term competition from those overseas, where quarterly earnings are not widely made. While some feel it makes logical sense to forego the quarterly predictions, the predictions likely will not disappear anytime soon because the consensus still feels they're worthwhile. When there's surprise, panic tends to be not that far behind.

To further your discussion of quarterly earnings, be sure to check out the Dividends and Earnings lesson as well as the What Causes Stock Prices to Change lesson located in the Teacher Support Center ( www.smgww.org). The Innings and Earnings edition of the In the News newsletter will also be beneficial to your students. The two lessons are accessible by clicking "Lesson Sequence" and then selecting "Display a Complete Outline of All Lessons." To access the newsletter, click "Publications," select "Show All Publications by Name," and then select "In the News."

If you're looking for some stock ideas, take a look at this article by New York Mets legend turned Wall Street analyst Lenny Dykstra. He discusses buying "calls," or options, which SMG doesn't allow, but anyone buying a call believes a stock price is going up in the short-term. Therefore, if he's right, some of the stocks he mentions may get some of your students back in the hunt.

This article was written by a staff member of The Stock Market Game.

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